A sale like no other (Corporate Dealmaker)

A sale like no other

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If divestiture were an Olympic sport, you'd have to rank the team from Royal Ahold NV as a top contender for a medal. For one thing, the Netherlands-based international grocery giant recently completed a global marathon of a selloff that finished four months ahead of schedule and raised €3.1 billion ($3.8 billion), significantly more than the €2.5 billion that the company had pledged in November 2003 -- despite the program being born of dire necessity, as often is the case with such efforts. And there's also the way the team's leaders sum up the experience, reminiscent of the understated assessments winning athletes often favor. "The last few years especially were intense but fun," says Maarten Schoonus, Ahold's vice president of mergers and acquisitions.

The intense part, at least, is easy to envision. In February 2003, Ahold was ready to implode, and many people were calling it "Europe's Enron." The company's aggressive expansion under CEO Cees van der Hoeven -- who acquired some 50 companies worldwide over the previous decade -- had slowed and then ended in scandal, with Ahold admitting it overstated earnings by more than $1 billion, mainly at its U.S. Foodservice unit. Van der Hoeven and CFO Michiel Meurs resigned. They left behind a sprawling collection of companies in 28 countries, with few central controls and a debt burden of €12.3 billion. For 2002, Ahold posted a €1.2 billion loss on €63 billion in sales.

The survival of the company -- more than a century old, its ubiquitous Albert Heijn stores a fact of daily life in the Netherlands -- was at stake. The board brought in a new management team: In September 2003, Anders Moberg became CEO, which he had been at Swedish furniture retailer Ikea; Hannu Ryöppönen, former finance director of London-based private equity firm Industri Kapital Group and a former Ikea executive, was named CFO; and Dutch M&A lawyer Peter Wakkie was installed in the new post of chief corporate governance counsel. Moberg's "Road to Recovery" plan, unveiled that fall, laid out changes in organization and governance aimed at turning a loose federation of businesses into a single company with a focus on generating value. And a major feature was a pledge to divest all businesses incapable of meeting certain profitability and return criteria and becoming No. 1 or 2 in their respective markets within three to five years.

Van der Hoeven had initiated some divestitures at the end of his tenure, but now the program was truly urgent. Over the next two years, Schoonus and the other members of the team went on to sell 23 companies in Europe, Latin America, Asia and the U.S., experiencing almost an entire career's worth of complexities. There were sales to strategic buyers (in Thailand, Malaysia and Peru, among other places) and to financial buyers (especially in the U.S. and Spain). Most of the divestments were handled via auctions, a few of which involved a process known as vendor due diligence. There was a snag with Argentine antitrust authorities, which still awaits resolution. The impact on employees and the role of labor unions had to be recognized in every deal. Along with whole businesses, there were stakes in joint ventures and blocks of stores (such as 13 hypermarkets in Poland) to be shed.

For Schoonus, a 41-year-old Dutchman who joined Ahold as an associate controller in 1991, all this wasn't just a matter of undoing somebody else's handiwork. Since becoming M&A chief in 2001 (after holding various operational positions in subsidiaries such as Dutch wine and spirit retailer Gall & Gall), he had helped acquire some of the same properties that went on the block. At times, he acknowledges, the process could be "emotionally difficult." But he knew very well that Ahold had no choice. "We needed cash," he says.

Schoonus and his four-person team in the Netherlands were in charge of all divestments outside the U.S., reporting directly to CFO Ryöppönen, from whom Schoonus says he learned a lot about dealing with financial buyers. They also got support from governance chief Wakkie. On the U.S. deals, Brian Hotarek, former CFO of Ahold's U.S. operations, led the charge (see box, page 17), keeping Schoonus informed of progress.

A global un-shopping spree ...
On the eve of its earnings restatement in February 2003, Ahold shares closed at €9.71; within days they fell to €2.80. The company was operating in 28 countries and had €12.3 billion in debt (under Dutch accounting rules). Restated 2002 results showed a loss of €1.2 billion on €63 billion in sales.		Royal Ahold 2002

In November 2003 a new CEO, Anders Moberg, laid out a "road to recovery" program, with divestitures a key element. Here's an overview of the three-year sell-off campaign, which has generated gross proceeds of €3.1 billion.
Region	2003	2004	2005
U.S.	Golden Gallon, Southeastern convenience store chain, sold to The Pantry Inc. for $187 million.	BI-LO and Bruno's, southeastern grocery stores, sold to Lone Star funds for up to $660 million.	In upstate New York, Tops Markets subsidiary sells 198 Wilson Farms and Sugar Creek convenience stores to WFI Acquisition Inc.
Europe	Various properties are sold, including a restaurant and a chain of natural products stores in the Netherlands.	Spanish retail operations sold to Permira Funds for €685 million; 13 Polish Hypermarkets sold to Carrefour; Dutch foodservice wholesaler Deli XL sold to Bidvest Group for €140 million.	Stake in Spanish winery Luis Paez is sold.
Latin America	Supermarket operations in Chile, Paraguay and Peru are sold.	Brazilian retail grocery chain Bompreco is sold to Wal-Mart and credit card operation Hipercard to Unibanco, for a total of $500 million. Brazilian retail chain is sold to G. Barbosa to Acon Investments; 85% of Argentina's Disco chain sold to to Chile's Cencosud.	Stake in Central American joint venture Carhco sold to Wal-Mart; sale of remaining 15% of Disco to Cencosud, delayed by antitrust authorities; when complete, total transaction value expected to be $315 million.
Asia	Indonesian operation sold to PT Hero Supermarket for €12 million. Malaysian operations sold to Dairy Farm International.	Stake in Thailand's CRC Ahold (retail operations plus a wholesale business) is sold to partner Central Group.
Source: Royal Ahold

... helps produce a better-focused company
Retail operations, now concentrated in Europe and the eastern U.S., have been grouped into "arenas" for greater efficiency. U.S. Foodservice, the big national wholesaler, is being reorganized into two operating companies.	Royal Ahold 2005

Ahold's preliminary 2005 sales were €54 billion; estimated earnings were €178 million and debt was down to €6.1 billion (under international accoutning rules). In late January the company's shares were trading around €6.39.
FY 2005 preliminary revenue (in €billion)

The team had to do its work against a backdrop of negative developments stemming from the scandal, including a securities class action in the U.S. In January, Ahold announced it had received preliminary approval of a $1.1 billion settlement of that suit. With all the potential for distraction, says Schoonus, the long hours and frequent traveling to faraway lands -- all the while keeping an eye on deals done by U.S. colleagues in that country -- may actually have been a blessing of sorts. "You can imagine that traveling all over the world, the trips are exhausting, you are a long way from your families, you have to cancel holidays," he says. "But all things were necessary to keep on the targets."

In the end, most observers think, the team's dedication paid off. "I have never had the impression they announced a deal because they were pushed to it," says Antwerp-based analyst Pascale Nachtergaele of Delta Lloyd Securities. "They succeeded in almost everything they wanted to do, and also at a reasonable price."

The broader Road to Recovery plan has largely succeeded as well, with profitability restored and debt paid down (see chart, page 16). True, Ahold faces tough competition in its core retail markets in the U.S. and the Netherlands; that's one big reason why Standard & Poor's isn't ready to bestow an investment-grade rating, another one of Moberg's goals. Still, the company has come a long way in a short while -- and the divestment program played a big role in the journey.

So how did Ahold do it? It helped a lot that a good supply of buyers around the world, many of whom expressed interest as soon as the sell-off news was out, enabled Ahold to keep the divestment process competitive. Financial buyers, long interested in the grocery business and its strong cash flows, have only increased their appetites in recent years. Strategic buyers, meanwhile, are often interested in gaining scale, though the industry is now so concentrated that they frequently run up against antitrust barriers.

The vendor due diligence process proved an effective way to speed deals with buyers in Europe. What vendor due diligence primarily does, Schoonus explains, is bring transparency to the asset being auctioned. It works this way: The vendor hires an independent party providing transaction services -- usually an international accounting firm -- to assess the asset in question from various angles including financial, tax, information technology and legal. This independent party accepts a liability to the buyer for its report. Potential buyers receive the report and, in the Ahold deals, a relatively brief period of access to a data room to conduct their own due diligence. Ahold did its vendor due diligence work mainly with accounting firms PricewaterhouseCoopers and Ernst & Young, as well as with Peter Wakkie's old law firm, DeBrauw Blackstone Westbroek.

Vendor due diligence can have the additional advantage of speeding up the financing, because the banks lending the money rely on the same report. It does have its risks; it may turn up negative information. But the seller, of course, can remedy anything that needs fixing. All in all, Schoonus says, the technique keeps the seller in the driver's seat -- able to move the auction speedily, with more participants, who in turn have less leeway to delay things.

Ahold used vendor due diligence in the €685 million sale of its loss-making Spanish operations to private equity firm Permira, completed in December 2004. Schoonus is most proud of that deal. "Expectations were way lower than what we finally got," he says. "This was due to great teamwork between the local company and its management and all our advisers," from J.P. Morgan and DeBrauw Blackstone.

There had been speculation that lack of interest and/or antitrust concerns would force Ahold to break the business into two parts -- mainland Spain and the stronger Canary Islands operations. But the company was able to create a competitive auction among financial buyers including Apax Partners, CVC Capital Partners Ltd. and Vista Capital. In the end, Schoonus says, Ahold went with Permira because of its price, conditions, professional behavior and ability to conclude a deal rapidly.

Far less smooth has been Ahold's divestment of its Disco SA Argentine supermarket chain, a roller coaster of a sale that began soon after the Road to Recovery plan was announced and still wasn't quite completed at press time. In November 2003, Ahold and Chilean retailer Cencosud SA (which had agreed four months earlier to buy Ahold's Santa Isabel Peruvian chain) announced they were in exclusive negotiations on Disco, only to end them a month later without giving a reason. Shortly thereafter, on Dec. 24, Ahold revealed it was in exclusive talks with French supermarket operator Casino Guichard-Perrachon SA and Argentine businessman Francisco de Narvez, only to end those talks a month later, again without elaborating.

The process had begun with a cloud hanging over it from Ahold's July 2003 revelation of "questionable transactions, including inaccurate control information and control weaknesses," related to the business, following an internal accounting investigation. Ahold also confessed a reduction in pretax profit at Disco of about €8 million.

Finally, in March 2004, Ahold announced an agreement to sell Disco to Cencosud for about $315 million, and Cencosud went on to take possession of an 85% stake in Disco. But a holdup with antitrust approval in Argentina has until now kept a 15% stake in Disco in escrow. Schoonus will only say that while Argentina is a "beautiful country," business there is not done "in an Ahold way."

In between the extremes of the Spanish and Argentine deals have been myriad other transactions, ranging from small but significant sales (a restaurant in the Netherlands, a winery stake in Spain) to large and complex ones (the U.S.-based Bi-Lo and Bruno's chains, auctioned off to an affiliate of Dallas-based private equity firm Lone Star Funds for up to $660 million). Except for the loose end of the Disco deal, the culmination of the arduous divestment program came with the undramatic sale last September of the Dutch wholesale business Deli XL to South Africa's Bidvest Group Ltd. for about €140 million, lower than the €170 million to €200 million some analysts had projected.

Together with other Road to Recovery measures, the sales have produced a more integrated Ahold, one that's concentrated on key markets in the Netherlands, in Central Europe, and in the eastern United States. They have also helped to turn the page in the story of a company that dates to 1887.

That year, 22-year-old Albert Heijn took over his father's small grocery store in Zaandam, selling groceries, dredging nets and tar. Within a decade, he had opened nine additional stores, and in 1911 he introduced the first Albert Heijn branded products: cookies he baked himself in the kitchen of a local mansion.

In 1948, Albert Heijn became one of the first companies listed on the Amsterdam Stock Exchange after World War II. It was reincarnated as Ahold (combining the founder's initials joined with a suffix indicating a holding company) in 1973, with Albert Heijn as a subsidiary. (The "Royal" in the name was a 100th anniversary birthday present from Queen Beatrix in 1987.)

Ahold entered the U.S. in 1977 by purchasing the Bi-Lo grocery chain in the Carolinas and Georgia, followed by the acquisition of Carlisle, Pa.-based Giant Food Inc. in 1981 and the purchase of Finast in Ohio in 1988. Under Van der Hoeven, a former Royal Dutch/Shell Group executive, the buying gathered steam in the U.S. and the developing world.

Van der Hoeven's U.S. ambitions were stymied in 1999, when U.S. regulators rejected Ahold's acquisition of Pathmark Stores Inc. in the metropolitan New York area on antitrust grounds. So Ahold adjusted its strategy, entering the wholesale food business by buying U.S. Foodservice in 2000, gaining access to an extensive, nationwide food-distribution network servicing more than 20 million households. It then snapped up Deerfield, Ill.-based Alliant Foodservice Inc. for $2.2 billion, adding 17 large U.S. cities to its Dutch parent's reach.

"The planned acquisition goes hand in glove with our growth strategy," Jim Miller, president and CEO of U.S. Foodservice, said the day the deal was announced. It certainly looked that way through the third quarter of 2002. But the revelations about the earnings overstatement, with U.S. Foodservice at the center, changed everything. Miller resigned in May 2003, quickly followed by CFO Michael Resnick and David Abramson, executive vice president and general counsel. As of January 2006, Resnick and former chief marketing officer Mark Kaiser awaited trial on criminal charges in the U.S., and two other former vice presidents had pleaded guilty. Miller has not been charged.

Back in the Netherlands, meanwhile, Van der Hoeven, former CFO Michiel Meurs and two other top executives are expected to face criminal charges in May 2006. All have denied wrongdoing.

Anders Moberg, who took over in September 2003, is a Swede who after spending most of his career at Ikea also served a brief stint at Home Depot Inc. When he joined Ahold, he told Cable News Network this past May, he first tried to speak to as many people within the company as possible to explain his philosophy on the one hand and try to understand what went wrong on the other. But with the company near bankruptcy, he also naturally delved into the numbers and talked to Ahold's banks, which agreed to a €1.75 billion credit facility in November 2003. Moberg found that Ahold's problems did not all stem from U.S. Foodservice, but went much deeper. The company, as he put it, "ran out of control."

During the divestment program, Ahold also tackled the legal difficulties resulting from the accounting scandal head-on. It replaced a decentralized system of internal controls with a one-company system with central reporting lines; in his new position, Wakkie would be responsible for internal governance policies and practice. It also created two departments to further develop reliable and transparent business control; converted to International Financial Reporting Standards, in compliance with the Sarbanes-Oxley Act of 2002; and from the start cooperated fully with the U.S. Securities and Exchange Commission's fraud investigation, with which it reached a settlement without having to pay a fine. It reached a separate settlement with Dutch prosecutors.

Internally, Ahold has established a 24-hour hotline employees can call in the U.S. and Europe to report -- anonymously, if they choose -- any irregularities. About 15,000 associates and almost all middle management in the U.S. and Europe have participated in a financial integrity course.

In a physical demonstration of the new face of Ahold, the company moved its corporate offices from Zaandam to Amsterdam late last year. The new offices are less than half the size of the older ones and house 100 employees compared with 220 before. Slogans such as "Passion for Our Business" and "Integrity Always" appear in large print on the walls, and symbolizing its new transparency, only senior managers have their own offices, while everyone else, including Schoonus, has a desk in an open space.

The moniker Ahold uses for the new digs, "group support office," is meant to reflect its repositioning as more operationally focused. Efficiency gains have come from reorganizing the retail businesses into "arenas," an integration effort that, while sometimes disruptive to implement, enables the company to take advantage of its scale in a way it couldn't in the decentralized days. Last November, Ahold also signed a major five-year outsourcing deal giving Electronic Data Systems Corp. responsibility for maintaining Ahold's global IT infrastructure in a move Ahold predicts will lead to aggregate cost savings of roughly €166 million over five years from streamlining its infrastructure. "If you're going to restructure Ahold to operate as a global grocery operation, the only way you can do that is to get everyone on common platforms," says Trevor Nagel, head of global technology practices at Pillsbury Winthrop Shaw Pittman LLP, who advised Ahold on the deal.

Acquisitions are still part of the strategy, Schoonus says, but those, too, reflect a new focus. Integration is a top priority. Nowadays Ahold is interested in concentrated, smaller acquisitions it refers to as "add-ons" and "fill-ins" along the lines of last October's purchase of 56 Julius Meinl stores from Austria's Julius Meinl International AG in the Czech Republic, converted in record time into Albert supermarkets.

Schoonus says it's an absolute must to visit all the stores of a potential target to get an understanding of the business, looking at everything from the basket size to the number of trucks in the parking lot to the lines at the checkout counter to the paperwork in the back office. While the financial criteria always involve discounted cash flows, Schoonus says, "if you have seen the stores, you can put it into better context."

The arena structure helps on the dealmaking side, Schoonus explains, because the heads of the arenas know what's going on in their markets; they work hand in hand with the M&A team -- for example, in keeping tabs on potential targets. Twice a year, the 80 top staffers from all over the company gather to review strategy -- a benchmarking session that gives top management the opportunity to hear from key commercial and operational people and learn how they see the business developing.

Ahold's biggest challenge remains to whip U.S. Foodservice into shape. Late last year, it announced plans to cut about 700 jobs at the business, which is being split into two operating companies with separate financial targets. They are Broadline, which accounts for 85% of net sales, supplying food and retail products to independent restaurants, healthcare providers and government agencies, and Multi-Unit, which caters to large chain restaurants with multiple units, mainly in the "quick-service" and "casual-theme" restaurant segments.

While Ahold is not expected to sell any part of the business immediately, analysts say the dual structure gives them the possibility to do that further down the line. "They've done a good job securing that option," says Bill Bishop, president of Barrington, Ill.-based Willard Bishop Consulting, a specialist in food marketing.

Ahold is due to report fourth-quarter 2004 figures in March, but preliminary and unaudited figures released in January point to a 0.6% rise in net sales, to €10.8 billion in the fourth quarter, compared with the same period a year earlier. Sales at its retail operations fell by 0.9%, led by declines at its Giant-Carlisle/Tops and Albert Heijn arenas.

As Ahold tones down its acquisition strategy, Schoonus is no less enthusiastic about the task ahead and says that even smaller deals can be interesting. Except for Hannu Ryöppönen, who left Ahold in September and was replaced by British Airways plc's former CFO John Rishton at the start of this year, the whole team that worked on Road to Recovery is still with the company, which makes Schoonus proud. And while there obviously won't be as much pressure on the deal team as there was in the last three years, Schoonus has no regrets: "Doing the deals, that's the fun part. That keeps you going."

Of course, it's a lot easier to keep going on behalf of a company that has in some sense rediscovered itself. The Heijn family pulled back from the business in 1989, when Albert Heijn, great-grandson of the founder, retired as president and CEO after 27 years, going on to serve on Ahold's supervisory board until the mid-1990s. When Ahold moved its offices late last year, a statue he dedicated to the company moved along with it. Called "Beppie," it depicts a Dutch female shopper and is meant to remind employees that the customer always comes first: "Lest we forget for whom we work," the inscription reads. CD

Downsizing in America

The convenience stores were the easy part, explains Brian Hotarek, the former CFO of Ahold U.S.A. who oversaw the crucial U.S. component of the company's divestment program. "While it was a good business it really wasn't a core business for Ahold," he says.

Indeed, Ahold had decided to exit convenience stores even before forming its three-year Road to Recovery plan. First to go was Golden Gallon, a Chattanooga, Tenn.-based chain Ahold had acquired from a private individual in 2000, followed in June 2005 by the sale of 198 stores in New York State.

But to reach its ambitious divestment target, Ahold also needed to shed assets that while deemed "nonstrategic," were closer to its core -- such as Bruno's and Bi-Lo's, two leading supermarket chains in the Southeast. For advice on these and all other sales it turned to Timothy Carroll, head of the consumer and retail group at Chicago investment bank William Blair & Co. Carroll, who has nearly a decade of food retail deals under his belt and whose first contact with Ahold had been on the other side of the table in the Golden Gallon deal, says Bi-Lo/Bruno's is the most complex transaction he's ever worked on.

Ahold knew from the start that the divestiture wouldn't be simple; regulatory, labor union and other issues made it unlikely that a single buyer would buy both businesses in a single transaction. So it began by allowing strategic buyers to bid on pieces of the company as well as strategic and financial buyers to bid on the whole package. Interest was fortunately high, and in December 2004, nearly a year after putting the chains on the block, Ahold agreed to sell them to an affiliate of Dallas-based Lone Star Funds for up to $660 million in cash. There was one major glitch: The buyer felt that a number of the stores didn't fit into its strategy.

Ahold solved the problem by splitting the final deal into $560 million up front and up to $100 million to be paid once Ahold had sold these unwanted locations, which it and Bi-Lo hired Carroll to do. Lone Star also agreed to take over the obligations of the lease agreements on the stores it did acquire, giving the deal a $1.2 billion enterprise value.

"It was a very complicated transaction, but it worked," Carroll says. He adds that Ahold expects to get the final installment of about $100 million in April, after selling the stores to C&S Wholesale Grocers Inc., a Keene, N.H.-based privately held firm.

After the Bi-Lo/Bruno's deal and some other, simpler sales, Ahold operates about 820 stores in the U.S., from southern New Hampshire to Virginia, under such well-known names as Stop&Shop and Giant.

"It's a business about local brands," says Hotarek, who joined Stop & Shop as vice president for finance in 1984 and since September reports directly to Ahold CEO Anders Moberg on special projects. To a shopper that may sound obvious. But for a global giant that almost collapsed after growing too big, it's a point to keep in mind. - Renee Cordes

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